Indian Prime Minister Narendra Modi’s plan to reduce consumption taxes on everyday goods could provide billions of dollars in annual relief and stimulate demand in an economy preparing for potential US tariffs, experts say.

US President Donald Trump has warned he may double import duties on India from 25% to 50% in response to New Delhi’s purchase of Russian oil, arguing such transactions help Moscow finance its war in Ukraine.

The threat has cast uncertainty over the outlook for the world’s fifth-largest economy, with Indian exporters cautioning about declining orders and significant job losses.

Calling Washington’s move “unfair, unjustified and unreasonable,” New Delhi is working to cushion the impact.

Modi, during his recent Independence Day address, pledged to “reduce the tax burden on the common man.”

The proposed cuts to the goods and services tax (GST) would make items ranging from small cars to air conditioners more affordable for consumers, according to economists.

Currently, the GST functions under a four-tier structure, with rates spanning from five to 28%. Under Modi’s plan, most goods would be simplified into just two categories, taxed at either five or 18%.

The Indian leader has called the change a “Diwali gift”, a reference to the annual Hindu festival of lights when consumers splurge on everything from gold and clothes to consumer electronics.

‘Sizeable savings’
Trump’s tariffs — and their impact on ordinary Indians will hinge on how much progress is made towards a Russia-Ukraine peace deal, and whether New Delhi can secure alternative oil suppliers before the US president’s August 27 deadline.

But experts say Modi’s tax reform could help shore up demand by reducing tax collections by between $13 billion and $17 billion.

Analysts at Emkay Global Financial Services called the policy a “welcome reform towards boosting domestic consumption”.

They estimated that about the vast majority of items currently subject to the top 28% rate would be taxed at 18%, while “nearly all” in the 12% tier would move into the 5% bracket.

Analysts at Motilal Oswal, an Indian financial services firm, said the changes would bring benefits to a wide range of sectors and “sizeable savings” to households.

The fate of the proposal ultimately rests with the GST Council, which includes representatives from state governments and has struggled to achieve broad consensus in the past.

If approved, the cuts would strain public finances, according to experts.

However, they said, they could also help to offset tariff risks and burnish Modi’s credentials among the middle class.

The proposal comes ahead of expected elections later this year in Bihar, a large, Hindu-majority state of 130 million people that is a key political battleground for Modi.

“The popular economic narrative right now is that of Trump’s 50% tariffs and how the US-India relationship is seeing setbacks,” Deepanshu Mohan, economist at OP Jindal Global University, told AFP.

“The GST readjustment is a strong response from Modi in that context. It’s Modi telling the middle class: ‘We are trying to make sure you have enough at your end,'” Mohan said.

But, he added, it was also an acknowledgement that India’s economy had not worked for its “low middle-income class for some time”.

US-India Trade Tensions

Although economists have long urged an overhaul of the GST framework, Modi’s unexpected announcement comes at a time when US-India relations have sunk to a multi-decade low.

Experts warn that without a trade agreement, Trump’s proposed tariffs could push India’s GDP growth below 6% this fiscal year lower than the Reserve Bank of India’s projection of 6.5%.

India’s position on Russian oil imports will become clearer by late September, as most of this month’s shipments were contracted before Trump’s threats, according to trade intelligence firm Kpler.

Kpler analyst Sumit Ritolia told AFP that while Indian refiners are showing “growing interest” in US, West African, and Latin American crude, this reflects “greater flexibility, not a deliberate pivot.”

“Unless there is a clear policy shift or a sustained change in trade economics, Russian supplies will remain a central part of India’s crude basket,” Ritolia added.

Meanwhile, the outlook for US-India trade talks remains uncertain as the tariff deadline draws closer.

New Delhi insists it is committed to reaching a deal, but Indian media reports suggest Washington has postponed a planned late-August negotiating visit to New Delhi.